Trading on the stock exchange floor. When an individual wants to place an order to buy or sell shares, he contacts a brokerage firm that is a member of the Exchange. A registered representative or RR will take his order. He or she is a trained professional who has passed an examination on many matters including Exchange rules and producers.
The individuals order is relayed to a telephone clerk on the floor of the Exchange and by the telephone clerk to the floor broker. The floor broker who actually executes the order on the trading floor has an exhausting and high-pressure job. The trading floor is a larger than half the size of football field. It is dotted with multiple locations called trading posts. The floor broker proceeds to the post where this or that particular stock is traded and finds out which other brokers have orders from clients to buy or sell the stock, and at what prices.
If the order the individual placed is a market order -which means an order to buy or sell without delay at the best price available-the broker size up the market, decides whether to bargain for a better price or to accept one of the orders being shown, and executes the trade-all this happens in a matter of seconds. Usually shares are traded in round lots on securities exchanges.
A round lot is generally 100 shares, called a unit of trading, anything less is called an odd lot. When you first see the trading floor, you might assume all brokers are the same, but they arent. There are five categories of market professionals active on the trading floor. Commission Brokers, usually floor brokers, work for member firms. They use their experience, judgment and execution skill to buy and sell for the firms customer for a commission. Independent Floor Brokers are individual entrepreneurs who act for a variety of clients.
They execute orders for other floor brokers who have more volume than they can handle, or for firms whose exchange members are not on the floor. Registered Competitive Market Makers have specific obligations to trade for their own or their firms accounts-when called upon by an Exchange official-by making a bid or offer that will narrow the existing quote spread or improve the depth of an existing quote. Competitive Traders trade for their own accounts, under strict rules designed to assure that their activities contribute to market liquidity.
And last, but not least, come Stock Specialists. The Exchange tries to preserve price continuity- which means that if a stock has been trading at, say, 35, the next buyer or seller should be able to an order within a fraction of that price. But what if a buyer comes in when no other broker wants to sell close to the last price? Or vice versa for a seller? How is price continuity preserved? At this point enters the Specialist.
The specialist is charged with a special function, that of maintaining continuity in the price of specific stocks. The specialist does this by standing ready to buy shares at a price reasonably close to the last recorded sale price when someone wants to sell and there is a lack of buyers, and to sell when there is a lack of sellers and someone wants to buy. For each listed stock, there are one or more specialist firms assigned to perform this stabilizing function.
The specialist also acts as a broker, executing public orders for the stock, and keeping a record of limit orders to be executed if the price of the stock reaches a specified level. Some of the specialist firms are large and assigned to many different stocks. The Exchange and the SEC are particularly interested in the specialist function, and trading by the specialists is closely monitored to make sure that they are giving precedence to public orders and helping to stabilize the markets, not merely trying to make profits for themselves.
Since a specialist may at any time be called on to buy and hold substantial amounts of stock, the specialist firms must be well capitalized. In today s markets, where multi-million-dollar trades by institutions i. e. banks, pension funds, mutual funds, etc. have become common, the specialist can no longer absorb all of the large blocks of stock offered for sale, nor supply the large blocks being sought by institutional buyers.
Over the last several years, there has been a rapid growth in block trading by large brokerage firms and other firms in the securities industry. If an institution wants to sell a large block of stock, these firms will conduct an expert and rapid search for possible buyers if not enough buying interest is found, the block trading firm will fill the gap by buying shares itself, taking the risk of owning the shares and being able to dispose of them subsequently at a profit.
If the institution wants to buy rather than sell, the process is reversed. In a sense, these firms are fulfilling the same function as the specialist, but on a much larger scale. They are stepping in to buy and own stock temporarily when offerings exceed demand, and vice versa. So the specialists and the block traders perform similar stabilizing functions, though the block traders have no official role and have no motive other than to make a profit. 3.